May 29, 2001
Economic Slump Empties
Office, Industrial Space
By MOTOKO RICH
Staff Reporter of THE WALL STREET JOURNAL
Office and industrial space is emptying at a faster pace than at any
time in the recent past, a sign the economic slowdown is hitting
commercial real estate harder than expected, according to a new study.
The report, set to be released this week by Torto Wheaton Research, a
unit of Los Angeles real-estate services firm CB Richard Ellis Services
Inc., shows that the amount of occupied office space in the first
quarter dropped by 17 million square feet across 72 U.S. markets
tracked by the research firm. This was the first time the overall "net
absorption rate" has fallen since Torto began its quarterly study in
1987, and in part reflects the 20 million square feet of sublease office
space that tenants poured into the market.
On the industrial and warehouse side, the
amount of occupied space dropped by 14.4
million square feet. The last time the
industrial net absorption rate decreased
was in the first quarter of 1991, when it
plunged by 34.4 million square feet.
The decline in appetite for space directly
contributed to a rise in vacancy rates: In the
first quarter, average office-vacancy rates
increased to 9.5% from 8.3%, the biggest
percentage-point jump in the survey's
recorded history. For industrial properties,
vacancy rates climbed to 7.2% from 6.6%.
Though those vacancy rates are nowhere near the 19% for offices and
10% for industrial properties seen in the late 1980s and early '90s, the
first-quarter figures still represent a sharp turnaround from last year,
when vacancy rates shriveled and rents skyrocketed. Torto's report
suggests the market now is in "payback mode."
Raymond Torto, managing director of Torto Wheaton, says not only
technology-oriented markets are being hit, but cities that weren't
driven by the high-tech boom also are seeing an increase in sublease
space and shrinking demand. According to the survey, Chicago,
Indianapolis, Phoenix and Kansas City, Mo., all exhibited negative net
absorption rates for the first quarter.
Now, he says, "the strategic question in people's minds is whether this
reflects a permanent reduction in demand or whether it's just
temporary."
Charlie Malet, executive vice president and national director of leasing
for Shorenstein Co. of San Francisco, a property owner, says that
although the market "was completely dead" in the first quarter, some
activity is starting to pick up, both in San Francisco and Boston,
another hard-hit market.
Office deals that are getting signed now, he says, are striking rents
30% to 40% below their peaks, but still are 10% to 15% north of
early-1999 levels.
Tenants attempting to sublease space are starting to accept lower
rents. "A lot of them are losing their shirt," says Bill Walsh, a senior
vice president with CB Richard Ellis in San Francisco. In some cases, he
says, evacuating tenants are forced to accept subleases at 50% of the
original rents.
Mr. Walsh says that currently, companies such as Charles Schwab Corp.,
PricewaterhouseCoopers LLP and Vodafone Group PLC are trying to
sublease space in the San Francisco market.
He adds, however, that these firms won't necessarily have to take 50%
discounts to their original rent levels.
For companies planning to renew leases or look for new space, the
market increasingly is swinging in their favor. "We're not going to
renew early," says Sean McCourt, chairman of the Ford Motor Land
Services Corp. unit of Ford Motor Co. and president of the International
Development Research Council, an association of corporate real-estate
executives. "There will be growing opportunities over the next couple
of months for some very attractive real-estate deals."
Industrial rents also are starting to soften in some markets. In Orlando,
Fla., for example, about 1.2 million square feet of new supply, as well
as a further one million square feet of sublease space, are flooding the
market, says Susan Ruby, an industrial broker with Cushman &
Wakefield Inc.
Moreover, demand is slowing. "Companies are saying, let's consolidate
everything into Atlanta and close down Orlando, Jacksonville or Miami,"
Ms. Ruby says. She says she recently signed a deal on behalf of Orange
County, Fla., for a data-storage facility at $3.60 a square foot, down
from the landlord's asking price of $3.95.
In some markets, property owners still are trying to hold fast to rent
levels. "Landlords are in denial at this point," says Jeffrey Hawley, an
industrial broker with CB Richard Ellis in St. Louis.
Despite the fact that vacancy rates for distribution facilities have
leapt to about 10% from less than 1% 18 months ago, Mr. Hawley says,
landlords haven't lowered their asking rents. He says it will take about
six months for owners to start dropping their rates, when he expects
them to fall by about 5%.
"Landlords are saying they're making good money right now, so there's
no reason to panic," Mr. Torto says.
Meanwhile, tenants are sitting on the sidelines waiting for rents to go
down. "So there's a huge gap between bid and ask right now," Mr. Torto
says. "It might be another quarter before this gets straightened out." |
